No. 95-781
In the Supreme Court of the United States
OCTOBER TERM, 1995
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASS'N, ETC., PETITIONER
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BRIEF FOR THE RESPONDENT IN OPPOSITION
WILLIAM F. KROENER, III
General Counsel
ANN DUROSS
Assistant General Counsel
THOMAS L. HINDES
MUNSELL W. ST. CLAIR
Senior Counsel
Federal Deposit Insurance Corporation
Washington, D.C. 20006
DREW S. DAYS, III
Solicitor General
Department of Justice
Washington, D.C. 20530
(202) 514-2217
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QUESTION PRESENTED
Whether the federal receiver's repudiation of future
obligations under a failed savings institution's sub-
ordinated debentures stripped those debentures of
their subordinated status, and elevated claims for
damages for the repudiation to the same priority on
liquidation as debts owed to the institution's general
creditors.
(I)
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TABLE OF CONTENTS Page
Opinions below . . . . 1
Jurisdiction . . . . 1
Statement . . . . 1
Argument . . . . 7
Conclusion . . . . 14
TABLE OF AUTHORITIES
Cases:
Audra-John Corp., In re, 140 B.R.752(D. Minn.
1992) . . . . 11
Brady, Texas, Municipal Gas Corp., In re, 936 F.2d
212 (5th Cir.), cert. denied, 502 U. S. 1013 (1991) . . . . 9-10
NLRB v. Bildisco & Bildisco, 465 U. S. 513
(1984) . . . . 9-10 ,11
Northwest Racquet Swim & Health Clubs, Inc.
v. RTC, 927 F.2d 355 (8th Cir.), cert. denied,
502 U.S. 815 (1991) . . . . 10
O'Melveny & Myers v. FDIC, 114 S. Ct. 2048
(1994) . . . . 11,12
RTC v. Cedar Minn Bldg. Ltd. Partnership,
956 F.2d 1446 (8th Cir.), cert. denied, 506 U.S.
830 (1992) . . . . 10
RTC v. ,Diamond, 45 F.3d 665(2d Cir.), cert.
denied, 115 S. Ct. 2609 (1995) . . . . 11-12
Unisys Fin. COrP. v. RTC, 979 F.2d 609 (7th Cir.
1992) . . . . 10
Western Real Estate Fund, Inc., In re, 922 F.2d
592 (1990), modified sub nom. Abel v. West,
932 F.2d 898 (lOth Cir. 1991) . . . . 10,11
Statutes and regulations:
Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Pub. L. No. 101-73,
103 Stat. 183 . . . . 2
12 U.S.C. 1441a(b) . . . . 2
(III)
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Iv
Statutes and regulations-Continued: Page
12 U.S.C. 1441a(b)(4)(A) . . . . 2
12 U.S.C. 1464a(q)(l) . . . . 2
12 U.S.C. 1464(s) (1988) . . . . 3
12 U.S.C. 1821(c)(L) . . . . 2
12 U. S. Cl. 1821(d)(51 . . . . 5
12 U.S.C. 1821(e)(ll . . . . 2, 13
12 U.S.C. 1821(e)(3) . . . . 4, 8
12 U.S.C. 1821(e) (3)(A)(ii) . . . . 10
12 U.S.C. 1821(e) (4)(B) (iii) . . . . 10
12 U.S.C. 1821(g) . . . . 5
12 C. F. R.:
Section 360.3(d) [1995) . . . . 5
Section 389.ll(a)(l) (1990) . . . . 5
Section 389.ll(a)(6) (1990) . . . . 5, 6,8,9
Section 389.ll(a)(8) (1990) . . . . 9
Section 389.ll(a)(8)-(10) (1990) . . . . 7
Section 389.11(a)(9) (1990) . . . . 5, 11
Section 389.11(c) (1990) . . . . 5,6,7, 8,9, 10
Section 563.8-l(d)(1)(ii)(a) (1987) . . . . 3
Miscellaneous:
53- Fed. Reg. (1988):
p.25,129 . . . . 7
p. 25,133. . . . 7
p.51,801 . . . . 3
54 Fed. Reg. 34,149 (1989) . . . . 3
55 Fed. Reg. 46,495 (1990) . . . . 8
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OCTOBER TERM, 1995
No. 95-781
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASS'N, ETC., PETITIONER
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.
ON PETITION' FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BRIEF FOR THE RESPONDENT IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App: Al-
All) is reported at 63 F.3d 900. The order and judg-
ment of the district court (Pet. App. A12-A14) are
unreported.
JURISDICTION
The judgment of the court of appeals was entered on
August 22, 1995. The petition for a writ of certiorari
was fried on November 20, 1995. The jurisdiction of
this Court is invoked under 28 U.S.C. 1254(1).
STATEMENT
1. Congress created the Resolution Trust Corpor-
ation (RTC) in part to receive and liquidate the assets
(1)
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2
of failed savings institutions. See generally 12 USC.
1.441a(b), enacted by the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, Pub.
L. No. 101-73, 103 Stat. 183. To that end, Congress
granted the RTC the "same powers and rights to
carry out its duties with respect to [certain federally
insured depository] institutions * * * as the Federal
Deposit Insurance" Corporation [(FDIC)] has under
sections 1821, 1822, and 1823 of [Title 12 of the United
States Code]." 12 U.S.C. 1441a(b)(4)(A). Section
1821(c)(1) of Title 12 authorizes the FDIC to act as
the receiver for failed savings institutions, and
Section 1821(e)(l) provides that the receiver may,
among other things, "repudiate any contract * * *
to which such institution is a party," if the receiver
determines that performance of the contract would be
"burdensome" and that repudiation "will promote the
orderly administration of the institution's affairs."
On December 31, 1995, the RTC'S statutory mandate
terminated, and the FDIC succeeded to the RTC'S
role as receiver or, conservator in pending proceed-
ings. 12 U.S.C. 1441a(m)(l). The FDIC has therefore
been substituted as the respondent in this case.
2. In June, 1987, Santa Barbara Savings and Loan
Association issued a series of subordinated deben-
tures with an aggregate face amount of $25 million.
Petitioner served as trustee on behalf of the holders
of the debentures.1 Most of the debentures were later
converted to stock in Santa Barbara Savings, leaving
___________________(footnotes)
1 The original trustee, Security Pacific National Bank, later
merged with petitioner Bank of America National Trust and
Savings Association. The merger had no effect on the matters
at issue in this case, and we refer to both parties interchange-
ably as "petitioner."
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outstanding debentures with an aggregate face
amount of $8.4 million. Pet. App. A3 & n.1.
The original offering circular for the subordinated
debentures indicated that the proceeds of the offering
were to be used to increase Santa Barbara's "regula-
tory capital." Pet. App. A58. At the time the deben-
tures were issued, the Federal Home Loan Bank
Board set, by regulation, certain minimum capital
levels that depository institutions were required to
maintain, in order to ensure that those amounts
would be available to absorb losses and to pay de-
positors and other creditors. See 12 U.S.C. l464(s)
(1988); see also, e.g., 53 Fed. Reg. 51,801 (19%3). Those
regulatory capital requirements served in part to
protect the federal deposit insurance fund, and to
"reduce the `moral hazard' engendered when the
[federal] insurer bears most of the cost of a[n]
[institution's] failure." Ibid.
Federal regulations permitted insured institutions
to include, as part of their regulatory capital, the
proceeds from the sale of certain subordinated debt
securities, principally on the ground that "sub-
ordinated debt meeting the requirements of the
regulation ha[d] some of the characteristics of other
types of permanent capital," such as common stock,
and therefore similarly reduced the risk to the fed-
eral deposit insurance program. 54 Fed. Reg. 34,149
(1989). In order to qualify as regulatory capital, the
funds had to be borrowed under an instrument that
"[c]learly state[d] that the [debt would be] subordi-
nated on liquidation, as to principal, interest, and
premium, if any, to all claims (including post-default
interest) against the. institution having the same
priority as savings account holders or any higher
priority." 12. C.F.R. 563.8-l(d)(l)(ii)(a) (1987). Ac-
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cordingly, the terms of the debentures at issue in this
case provided that they were to be subordinated (see
Pet. App. A4), and that the subordination would "in
no way be affected, modified, waived or revoked by
the occurrence of any Event of Default." Indenture
$4.02, at 24. The indenture agreement defined the
term "Event of Default" to include, among other
things, the passage of thirty days after any order
appointing a receiver, conservator, or liquidator for
Santa Barbara Savings. Id. 9.01, at 44.
In 1990, the Office of Thrift Supervision (OTS) de-
termined that Santa Barbara Savings had insufficient
capital to continue operations. The OTS therefore
appointed the RTC first as conservator, and shortly
thereafter as receiver, of Santa Barbara Savings.
Pet. App. A4, A59. In June 1990, the RTC, as receiver,
repudiated the debentures and the associated trust
indenture agreement. Id. at A4, A60. The repudiation
relieved the receiver from any obligation to pay, out
of Santa Barbara's assets, any future interest that
would otherwise have accrued on the debentures.
Holders of the debentures continued, however, to have
a claim for the amount of their principal investment,
together with interest accrued and unpaid on the date
the receiver was appointed. See 12 U.S.C. 1821(e)(3).
Petitioner, acting on behalf of the debenture holders,
filed proof of such a claim with the RTC, seeking
damages for the repudiation. The issue in this case
is the priority to be accorded to that claim on the
liquidation of Santa Barbara's remaining assets.
3. When the FDIC is forced to liquidate a failed
savings institution, allowed claims against the
institution's assets are paid according to priorities
established by statute and regulation. All claims in
any one priority "tier" must be provided for before
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any claim of lesser priority is paid, when the insti-
tution's assets are insufficient to pay all claims of
a particular priority, the claims in that tier are paid
pro rata, and no payment is made on any junior claim.
12 C.F.R. 360.3(d) (1995).
Three of the priority tiers are particularly rele-
vant here. Tier One encompasses the administrative
expenses of the receivership estate. 12 C.F.R.
389.ll(a)(l) (1990)? Tier Six includes claims by de-
positors (or by a federal insurer as their subrogee,
see 12 U.S.C. 1821(g)), and "all other claims which
have accrued and become unconditionally fixed on or
before the date of default." 12 C.F.R. 389.ll(a)(6)
(1990). Tier Nine includes "[c]laims that have been
subordinated in whole or in part to general creditor
claims," and specifies that such claim-s "shall be given
the priority specified in the written instruments that
evidence such claims." 12 C.F.R. 389.ll(a)(9) (1990).
A regulation in effect during 1989 and 1990 provided
that any claim for damages arising from. the re-
ceiver's repudiation of an executory contract entered
into by the insolvent institution was to be "classified
as a claim that has accrued and become uncondition-
ally freed on or before the date of default, and not as an
administrative expense of the receiver." 12 C.F.R.
389.11(c) (1990). When the RTC did not allow peti-
tioner's claim within the waiting period prescribed by
law (see 1.2 U.S.C. 1821(d)(5)), petitioner filed this
action in the district court, asserting that its claim
for damages caused by the repudiation of the sub-
ordinated debentures should not be subordinated to
___________________(footnotes)
2 For simplicity, we cite the version of the regulations in
effect in 1990, when the RTC repudiated the agreement in-
volved in this case.
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the claims of Tier Six general creditors, but rather
should share in any distributions made to the credi-
tors in that tier.
4. The district court agreed with petitioner that 12
C.F.R. 389.11(c) (1990) required that the claim for
damages for repudiation of the subordinated deben-
tures be accorded the same priority as the claims of
Santa Barbara's general creditors, including the
federal deposit insurance fund as subrogee of the
association's insured depositors. Pet. App. A13. The
court held that Section 389.11(c)'s reference to clas-
sification as a claim that has "accrued and become
unconditionally fixed on or before the date of default"
was a direct reference to the same language in Sec-
tion 389.ll(a)(6), and required that claims covered by
subsection (c) be classified in Tier Six, whatever
their other characteristics. See Pet. App. A22-A30
(rejecting various government arguments).
The court of appeals reversed. Pet. App. Al-All.
The court first observed (id. at A7) that subordinated
debt "[generally * * * stays subordinated to the
claims of general creditors upon the insolvency of
the institution where the subordinated debt served
as regulatory capital." In the court's view, "[t]here
would not be much point to subordination, or to
allowing subordinated debentures to be used as
regulatory capital, if this were not so." Id. at A7-A8.
The court then rejected petitioner's argument that
the similar language of Sections 389.ll(a)(6) and
389.11(c) required that any claim arising from
repudiation be treated as a Tier Six claim. Pet, App.
A8-A11. The court noted (id. at A8-A9) that some
claims that had "accrued and become unconditionally
fixed on or before the day of default," such as certain
federal tax claims and subordinated debts that had
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7
matured before the date the receiver was appointed,
were nonetheless assigned priorities lower than that
of general creditors by the more specific terms of
Section 389.11(a)(8)-(10).
The court of appeals also rejected petitioner's
argument that the RTC'S repudiation of the deben-
tures and the associated trust indenture deprived the
subordination provisions of any effect. Pet. App. AlO.
The court noted that, under the circumstances of this
case, the debentures' subordination provision, unlike
the failed institution's basic promise to pay principal
and interest, represented "a covenant running from
the investors to depositors and the government [and]
* * * intended to benefit [them] * * * in the event
that the [institution] cannot pay all its debts." Ibid.
Thus, "[i]t would make no sense to treat repudiation
of the failed [institution's] debt as though it nullifled a
subordination agreement designed to protect the gov-
ernment and the depositors in that precise eventual-
ity." Ibid. Because such an interpretation would not
serve the purposes of subordination, of repudiation, or
of allowing the use of subordinated debt as regulatory
capital, the court rejected petitioner's proposed con-
struction of the regulations.
ARGUMENT
1. Petitioner argues primarily (Pet. 10-11, 16-22)
that the RTC and the court of appeals have misinter-
preted 12 C.F.R. 389.11(c) (1990)-a regulation that
was adopted after the issuance of Santa Barbara
Savings' subordinated debentures (see 53 Fed. Reg.
25,129, 25,133 (1988)), and that was repealed `shortly
after the repudiation and claim at issue in this case
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(see 55 Fed. Reg. 46,495 (1990)).3 Section 389.11(c)
provided that if the repudiation of an executory
contract gave rise to a claim for damages, that claim
should be "classified as a claim that has accrued and
become unconditionally fixed on or before the date of
default, and not as an administrative expense of the
receiver." It therefore ensured that the receiver's
role in deciding to repudiate a contract would not
transmute the resulting claim for damages (see 12
U.S.C. 1821(e)(3)) from a claim against the assets of
the failed institution into an expense of the receiver-
ship, entitled to first priority in liquidation.
Petitioner focuses on the regulation's declaration
that such a claim -should be treated as one that had
"accrued and become unconditionally fixed on or
before the date of default''-language that is also
found in Section 389.ll(a)(6). That language merely
makes clear that the claim is to be treated, in
accordance with ordinary bankruptcy principles (see
pages 1O-11, infra), as one against the estate, arising
at or before the institution of the receivership, rather
than as a claim against the receiver itself. As the
court of appeals recognized (Pet. App. A8-A9), nothing
in subsection (c) changes the fact that any claim that
would otherwise take its priority from subsection
(a)(6) may nonetheless fall into a lower priority tier
if another subsection applies to it in more specific
___________________(footnotes)
3 The FDIC does not concede that Section 389.11(c), which
was not. in effect at the time the district court rendered its
decision, should have been applied in resolving this case. See
Pet. App. A7. The court of appeals did not reach that issue
(ibid.), and we do not address it here. The possibility that the
regulation petitioner asks this Court to reinterpret is not even
properly at issue is, however, another factor that counsels
against review in this case.
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terms. See, e.g., 12 C.F.R. 389(a)(8) (1990) (assigning
lower priority to federal income tax claims).
The court of appeals held only that a claim for
damages "measured by the principal amount of subordi-
nated debentures, and interest accrued through the
date the receiver was appointed, was covered by the
specific provision in Section 389.11(a)(9) for subordi-
nated claims, which supersedes the more general
provision of Section 389.11(a)(6). That construction of
the regulation does not conflict with any decision of
this Court or of another court of appeals. In the
absence of such a conflict, the court's straightforward
interpretation of a repealed regulation does not war-
rant further review by this Court.
2. Petitioner argues (Pet. 12, 15-16,'19-20, 22-23)
that, even if Section 389.11(c) does not apply, the
decision below conflicts with settled principles gov-
erning the repudiation of executory contracts in
bankruptcy, and with this Court's decision in NLRB
V. Bildisco & Bildisco, 465 U.S. 513, 531-532 (1984).
Petitioner contends that the decision below improp-
erly allows a federal receiver to repudiate the agree-
ments that otherwise govern a failed institution's
obligations to the holders of its debentures, while
enforcing the holders' agreement to subordinate the
debt. Petitioner misapprehends the nature of repudia-
tion. Repudiation by a receiver does not void a
contract ab initio; rather, it breaches the contract in
a particular way that has special legal consequences.
In the bankruptcy context, repudiation "constitutes a
breach of the contract which relates back to the date
immediately preceding the filing of a petition in
bankruptcy." Bildisco, 465 U.S. at 530; see also, e.g.,
In re Brady, Texas, Muncipal Gas Corp., 936 F.2d
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10
212,214 (5th Cir.), cert. denied, 502 U.S. 1013 (1991);
In re Western Real Estate Fund, Inc., 922 F.2d 592,
595 (1990), modified on other grounds sub nom. Abel v.
West, 932 F.2d 898 ll0th Cir. 1991). "Damages * * *
that result from the rejection of an executory
contract" are therefore treated as damages for a pre-
petition breach, and they must be handled through the
normal administration process as claims against the
estate (rather than, for example, as claims against the
trustee or debtor-in-possession); they remain, how-
ever, damages "on the contract." Bildisco, 465 U.S. at
531; see Western Real Estate Fund, 922 F.2d at 595.
The same principles apply here. The estate of a
failed thrift remains contractually liable for amounts
already due under a contract up to the date the
receiver is appointed or, in some cases, the date of the
repudiation. See, e.g., Unisys Fin. Corp. v. RTC, 979
F.2d 609, 611 (7th Cir. 1992); RTC v. Cedar Minn
Bldg. Ltd. Partnership, 956 F.2d 1446, 1449 (8th Cir.),
cert. denied, 506 U.S. 830 (1992); Northwest Racquet
Swim & Health Clubs, Inc. v. RTC, 927 F.2d 355,
360 n.14 (8th Cir.), cert. denied, 502 U.S. 815 (1991);
compare 12 U.S.C. 1821 (e)(4) (B)(iii) (lessor of repudi-
ated lease has a claim for all amounts in arrears
as of the date of repudiation) with 12 U.S.C.
1821(e) (3)(A)(ii) (repudiation damages are generally
determined as of date of appointment of receiver); see
also Bildisco, 465 U.S. at 531 (debtor-in-possession
assumes quantum meruit liability for contract bene-
fits received pending acceptance or repudiation of
contract). Claims for damages arising from repu-
diation of the contract are treated as claims for a
breach that occurred just prior to the appointment
of the receiver. Compare 12 C.F.R. 389.11(c) (1990)
(providing that damages for repudiation are not
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11
administrative expenses, but relate back to date of
default) with Bildisco, 465 U.S. at 531-532 (if debtor-
in-possession assumes contract, expenses and lia-
bilities incurred become administrative expenses).
The damages in question are measured, like any
other damages for breach of contract, on the basis
of the contract itself. Compare, e.g., Western Real
Estate Fund, 922 F.2d at 595; In re Audra-John
Corp., 140 B.R. 752,757-758 (D. Minn. 1992).
In this case, the debentures and the trust indenture
provided that the amounts due under them were to
be subordinated to the claims of general creditors,
and that the subordination would "in no way be af-
fected, modified, waived or revoked by the occurrence
of any Event of Default," including the appointment of
a receiver. Indenture 4.02, at 24. That subordina-
tion is "the priority specified in the written instru-
ments that evidence" petitioner's claim, 12 C.F.R.
389.11(a)(9) (1990), and nothing in the general law of
repudiation, or in any of the cases cited by petitioner,
requires that Santa Barbara's bondholders be relieved
of their subordination covenant for purposes of cal-
culating contractual damages arising from an event of
default of a sort that was clearly contemplated by the
parties' original agreement.
3. Petitioner contends (Pet. 10-14) that the deci-
sion below conflicts with this Court's decision in
0'Melveny & Myers v. FDIC, 114 S. Ct. 2048 (1994),
with cases that stand for the propositions that an
agency must abide by its own regulations and that a
statute's or regulation's plain language is not to be
disregarded in order to further a court's view of the
drafters' overall purpose, and with the Second Cir-
cuit's decision in RTC v. Diamond, 45 F.3d 665, cert.
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12
denied, 115 S. Ct. 2609 (1995). There is no substance
to any of the asserted conflicts.
In 0'Melveny, this Court held that a court should
not create a special rule of federal common law to
decide cases that would otherwise have been governed
by state law, where Congress had enacted a detailed
statutory scheme under which, for such purposes, the
federal receiver merely "step[ped] into the shoes" of
a failed thrift. See 114 S. Ct. at 2054. The court
of appeals in this case created no special federal rule
of decision to displace state law, but rather inter-
preted a federal regulation, reaching a result that is
fully consistent with principles of repudiation drawn
from general federal bankruptcy law. Nothing in
O'Melveny suggests a contrary result.
Petitioner's reliance on cases that require adher-
ence to the substance of agency regulations, or to
specific language in such regulations rather than to a
court's more general conception of their purpose, is
equally unavailing. As discussed above, neither the
RTC nor the court of appeals disregarded the reg-
ulation on which petitioner relies: to the extent that
that regulation applies in this case (see note 3,
supra), they merely adopted a different interpretation
of that regulation from the one that petitioner would
prefer. In accepting the RTC's interpretation, the
court of appeals-found it persuasive that "the purpose
of subordination and the purpose of repudiation would
be defeated" if the court adopted the contrary con-
struction urged by petitioner. Pet. App. A1O. How-
ever, the interpretation the court adopted does no
violence to the language of the regulation; and within
that limitation, the court surely did not err by taking
the regulation's purpose into account in deciding how
its language should be construed.
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Finally, nothing in the decision below conflicts
with the Second Circuit's decision in Diamond.
That case held that 12 U.S.C. 1821(e)(l) authorized
the RTC to repudiate burdensome leases that were
subject to state and local rent control regulations,
and that federal law further preempted state-law
protection against eviction to the extent such pre-
emption was necessary to effectuate the repudiation.
The court's decision rested on its conclusion "that the
rent regulations, while extensive, did not abrogate
the contractual nature of the landlord-tenant rela-
tionship, which was founded on a "contract" or
"lease" within the meaning of Section 1821(e)(l).
In this case there is no question about the con-
tractual nature of the underlying obligation, or the
receiver's power to repudiate it, The court of appeals'
holding with respect to the specific consequences of
that repudiation depends on the application of the
federal priority regulations and the terms of the
underlying contract, not on the nature of state
regulation of that contract or the federal preemption
of non-contractual state-law rules. There is very
little relationship between this case and Diamond,
and there is no conflict between the courts' decisions.
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CONCLUSION
The petition for a writ of certiorari should be
denied.
Respectfully submitted.
DREW S. DAYS, III
Solicitor General
WILLIAM F. KROENER, III
General Counsel
ANN DUROSS
Assistant General Counsel
THOMAS L. HINDES
MUNSELL W. ST. CLAIR
Senior Counsel
Federal Deposit Insurance Corporation
FEBRUARY 1996